Global growth has been well supported going into this year, and short-leading indicators had intimated this would continue into the latter part of the first quarter. However, data has become more mixed with some releases giving cause for concern. Some US data may have been impacted by the weather, but other aspects are troubling and suggest that more fundamental factors could be at work. New orders in US ISM manufacturing report slumped hard, a component we would expect to be less sensitive to current weather conditions.
Our Global Composite Index has peaked and is starting to turn down with increasing momentum. This clouds the outlook for the US later in the year.
Our short-leading indicator has taken sharp turn down due to some of the weak leading data from the US released recently. How much of this is weather related remains to be seen. Nonetheless, the momentum in coincident data we thought would last until later this quarter, may be beginning to fade already.
Real narrow money is turning down with increasing momentum. This creates a more challenging environment later in the year for the more liquidity-sensitive assets, eg industrial commodities and EM equities.
Excess liquidity is dropping alarmingly quickly in the eurozone. Tightening monetary conditions combined with greater growth in eurozone industrial production, which ‘absorbs’ liquidity, leaves less excess liquidity to bolster financials, equities, commodities, etc.
With no rate cut from the ECB today, an EONIA rate that is drifting higher, and ECB-defined excess liquidity continuing to fall as banks pay back previous LTRO loans, there is little short-term prospect of a boost in liquidity in the eurozone.
The gold/copper ratio is a good proxy for liquidity conditions and this is giving the same message. Economic conditions should toughen for the US in the second half of 2014.
We are seeing a similar picture for G7 growth from our other leading indicators.